Question

The preferred stock of Dolphin Pools pays an annual dividend of $6.25 a share and sells for $42 a share. The tax rate is 35 percent. What is the firm's cost of preferred stock?

Answer 1

kp = Do/Po

Kp = $6.25/$42

kp = 0.1488 = 14.88%

Explanation: Cost of preferred stock is equal to fixed dividend paid divided by the current market price. Preference shares are not tax-deductible. Hence, tax will not be considered in our calculation.